The T Report: Now What?
The Laundry Has Been Done
I hated investment advice based on “least dirty shirt”.
Now, here we are with DAX up more than the Nasdaq YTD, both in Euros and when converted to dollars. The IBEX index is now up some 35% or so since the July lows.
Anything that was hated or viewed as a good short is rallying the most
- Europe, especially Spain and Italy
- Banks, especially European banks
- Risky debt, especially periphery debt and high yield, along with CDS
Is the Re-Coupling Over?
We have been on the re-coupling theme for awhile now. We were completely bullish since June with an emphasis on beaten up names. Gradually we have seen more things fall off our “long” radar (JPM, S&P 500) and more things fall into our “short” radar (Apple, Nasdaq, and even S&P 500).
We have remained net long, and certainly on a beta adjustment have been very long as our “re-coupling” theory (sometimes referred to as bottom feeding) put us into some of the assets deemed most risky.
Well re-coupling has worked but as we stare at the investment landscape this morning, I am finding it hard to be excited by anything and want to get flat everything we’ve been long and short U.S. markets.
Is Being Right making us underestimate the potential of this move?
My gut is to go flat the longs and just have shorts. But are we underestimating the potential of this move. That is my fear. Are there good reasons to remain long? Are there now some people out there that need returns and will view the ECB statement as the “all clear” to buy risk and hope for the best?
That is a real concern. There are people who need a big move, and piling in long seems the last choice left to them. For pure shock and awe, look at some of these numbers
- Italian CDS, 310, was 350 yesterday, and closed last Friday at 470. 160 bps is about 7% of notional.
- The Spanish 10 year bond is up over 2 points today and almost 8 points on the week.
- IG18 is at 91.25 now. 9 bps tighter since Wednesday!
- Deutsche Bank is up 13% in two days (in Euros, more in $’s).
I cut some position yesterday and regretted it. Is getting out wrong? It feels right, but the strength and pain also feels real.
What Did the ECB do?
The ECB actually did very little of actual substance. As I wrote yesterday, the plan is only about a C. But since they were getting an F- before the announcement that is a big improvement. Also, you can take comfort in the effort they made that their view of the world is changing.
Non Farm Payroll – Only Good is Good
I think we need an actual, honest to goodness, good print to continue the rally. Even Ben with his itchy printing finger will have trouble justifying QE with markets at 4 year highs. I think we need to see a number above 150k to rally, or a number below 50k where maybe the QE crowd can prop things up.
Is Rajoy too Arrogant?
On July 25th, I asked How Dumb is Draghi? It was up to him to stop the slide. He did his part and yesterday is about the culmination of what he can do for now. He just cannot do more at this stage and stay within his mandate especially with growing resistance from Germany.
So now it comes down to Rajoy. Whereas I didn’t think Draghi was too dumb, and I bet on him, I am concerned Rajoy is too arrogant. It is now up to him to negotiate something that lets Spain start attempting to focus on the economy and not focus on funding.
Getting cheap money isn’t enough, and they don’t even have that yet. Rajoy needs to grab the money, lock in financing support and get in gear on the economy.
Too often he has shown a reluctance to negotiate when he feels things are going his way. He has shown a willingness to let things proceed at a snail’s pace. At this point, Rajoy is the bear’s best friend.
Re-coupled?
In the end, I like China still as it has most room to “re-couple” and is likely to come up with some new stimulus plan of their own.
On the periphery I think you can wait to buy. I’m definitely not bearish, but am looking for a pause. Same with credit markets, even CDS.
On the U.S., I just don’t see markets up here. I understand the need some will have to chase it, but I cannot bring myself to own U.S. stocks.
The catalyst for any retracement is likely QE off the table in the U.S., political rhetoric, or Rajoy screwing things up in Europe. The fear is real growth resuming in economic data in the U.S. and some big stimulus out of China.